ASSEMBLY JUDICIARY COMMITTEE

STATEMENT TO

ASSEMBLY, No. 1555

with committee amendments

STATE OF NEW JERSEY

DATED: MARCH 11, 1996

      The Assembly Judiciary Committee reports favorably and with committee amendments Assembly Bill No. 1555.

      This bill supplements New Jersey's probate code by addressing situations in which trustees named to serve also may be beneficiaries of the trust. This situation is common with trusts where a family member may serve as trustee with discretion as to payments of income and principal among family members. However, this situation presents the problem of the inherent conflict of interest between a trustee who could favor himself and the balance of the beneficiaries. Moreover, due to the increased complexity of the Internal Revenue Code and the positions taken by the Internal Revenue Service, certain powers held by a trustee can have the unintended consequences of causing a trustee who also happens to be a beneficiary of the trust to have the entire trust fund included in the trustee/beneficiary's estate, or can cause some or all of the trust income to be taxable to the trustee or be charged with a taxable gift in the exercise of his or her fiduciary powers.

      The bill prohibits a trustee/beneficiary from making discretionary payments of principal and income for his or her own benefit unless the power is limited by an ascertainable standard or the power is exercisable only with the consent of a person having a substantial interest in the trust. The bill would not affect such a power given to an independent trustee. The bill provides if there is no trustee who can exercise the power of invasion, a court can appoint a special trustee.

      The bill prevents unintended taxation by prohibiting a trustee/beneficiary (a) from making discretionary allocations in the trustee's favor of receipts or expenses as between income and principal, (b) from making distributions to discharge his or her legal obligations and (c) from exercising powers for a beneficiary other than the trustee to the extent that such beneficiary could exercise a similar power for the trustee.

      The committee amendments generally are technical in nature except that in subsection c. "may" is changed to "shall" concerning the appointment of successor trustees.